Donated donations

Charitable organizations are usually at the receiving end of a donation. Since most of them are non-stock non-profit organizations, their main source of funding are the contributions or donations given by natural or juridical persons. They enjoy income tax exemption on the contributions received on the rationale that the loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury. However, would a remittance by a charitable organization to another charitable organization of donations it received constitute a donation?

In 2014, the Securities and Exchange Commission (SEC) issued an opinion on whether or not a domestic non-stock, non-profit corporation may remit some, or all of its received donations to its foreign counterpart, a related party which has the ability to control, directly or indirectly, the domestic foundation. The foreign foundation pools the remittances it receives from the domestic foundation with other donations from other related organizations to fund their charitable programs worldwide. It is the foreign foundation that determines which program will be funded from the donations received from the domestic foundation. In resolving the query, the SEC treated the remittance as an act of donation, considering that the domestic foundation would give the amounts gratuitously and with all liberality in favor of the foreign foundation. The SEC then ruled that the domestic foundation is allowed to make a donation because under the Corporation Code, one of the powers of a corporation is to make reasonable donations and such act is not prohibited under its Articles of Incorporation.

The SEC’s treatment of the remittance may make us ask this question: If the act of a domestic non-stock, non-profit corporation of remitting to its foreign counterpart some or all of the contributions it receives is considered a donation, does this mean that it will be liable for donor’s tax? The National Internal Revenue Code (NIRC) imposes a 30 percent donor’s tax on net gifts if the donee or beneficiary is a stranger, such as juridical entities like corporations. However, the NIRC also provides that gifts in favor of a charitable organization are exempt from payment of donor’s tax provided that not more than 30 percent of the said gift shall be used for administrative purposes. The NIRC does not distinguish between a donee that is a domestic charitable organization or a foreign charitable organization.

On the other hand, it may be contended that the remittances should not be treated as donations for tax purposes. The transfers or remittances of the funds were made for the purpose of pooling funds between related parties so that the foreign foundation can budget the worldwide donations and determine the fund allotments of the programs which the domestic foundation will execute. By remitting the contributions that the domestic foundation receives, it aligns itself with the charitable objectives recognized by its foreign counterparts. Thus, it may be argued that the remittances are being made to carry out the purpose for which the domestic foundation was established, i.e. to support and conduct projects and programs for socio-economic development such as giving access to healthcare, educational assistance, feeding and nutritional trainings, without regard to race, color, creed, religion, national origin, sex and physical condition and to perform other charitable or social service activities.  Following this argument, it may be said that the transfer lacks donative intent.

 The proper tax treatment of these remittances remains disputable as of the moment. Nonetheless we cannot ignore the fact that the remittances or transfers by a domestic foundation to its foreign counterpart were not gratuitously made and only for the purpose of implementing its charitable objectives. As charitable organizations grow and continue to pursue their objectives, they will enter into different and complex transactions which may give rise to more novel tax issues.

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Rachel Bernadette B. Chua is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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